In a very complex economic and financial environment, the auditor must consider various business risks during the audit procedures.
Audit principles and methodologies frequently use the concept of risk to better orient audit procedures and allow the professional to focus on the relevant aspects.
The emphasis on business risk stems mainly from the consideration that the very complex economic-financial context and the variety of companies present on the market do not allow the use of a previously determined audit model, applicable to any type of business reality.
The ‘Risk-Based Approach’ model emphasizes the importance of the auditor’s understanding of sectoral peculiarities, organizational characteristics, strategic objectives, unusual or related party transactions, management complexities, and related risks of the company in question.
All this is to identify the potential impacts that these strategic, operational, and/or financial risks may have on the financial statements, in terms of the risk of incorrect financial statement measurements.
These are some examples of risk.
Audit risk
The audit risk is the risk of passing judgment without modification (positive view) on a budget that contains significant errors. The auditor plans and conducts his or her activities to reduce audit risk to an acceptably low level consistent with the objectives of his or her professional activity.
To limit this risk, it is necessary to assess whether the financial statements may contain a material misstatement and, consequently, to determine the nature, timing, and extent of the checks on the financial statements.
This also limits the risk that the auditor does not identify material errors that may be contained in the financial statements. In this case, we speak of the risk of identification.
It is mainly in the phase of assessing the risk of significant errors that the best audit firms in Delhi focus their attention on business risks and the repercussions that these may have on the items in the financial statements, through the analysis of its two components: intrinsic risk and control risk.
Intrinsic risk and its components
The intrinsic risk is the risk that there is a significant error in the financial statements, regardless of the internal control system implemented by the company. The main factors to consider in its evaluation are:
- Rotation, competence, and ethics of management personnel;
- Emphasis placed by management on achieving results;
- Influence of external factors on corporate operations such as inflation, interest rates, currency risks;
- Speed of innovation and development prospects for the sector;
- Profitability, equity, and financial leverage;
- Considerations on business continuity;
- Presence of significant transactions with related parties.
Control risk
Control risk is defined as the risk that a material misstatement in a financial statement item is not prevented, identified, and corrected by the company’s internal control system. This risk is therefore related to the effectiveness of the internal audit system itself.
The assessment of the control risk is the result of the knowledge and examination of the internal control system of the company and its effective application, carried out with auditing services in Delhi through the implementation of specific procedures called conformity surveys.
This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.
Posted By:
CA Aman Aggarwal
AKGVG & Associates.